How to Get a Small Business Loan

Written by Banks Editorial Team
6 min. read
Written by Banks Editorial Team
6 min. read

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The most common challenge small business owners experience is a lack of capital. When in need, the simplest way to obtain quick access to cash to get a business off the ground, purchase inventory or equipment, or expand operation is by taking out a small business loan.

A small business loan can help you fill cash flow gaps and take advantage of limited investment opportunities. However, before applying for a business loan, it’s a good idea to understand the requirements, the financing options available to you, and how to get one.

Quick and Easy Small Business Loans

The Typical Timeline to Get a Small Business Loans

The exact timeframe of a small business loan from start to finish depends on various factors, including the lender, the loan’s type, and the loan size. For example, SBA loans take 60 to 90 days and sometimes longer if the lender requires additional information.

Things You May Need to Get a Loan for Your Small Business

Several things go into determining your eligibility for a small business loan. Here’s what you need to increase your chances of approval for small business financing:

Personal and Business Credit Score 

Your credit score is the most obvious thing lenders look at when evaluating a borrower’s creditworthiness. Where your credit score stands currently determines whether or not you qualify for a loan. Depending on the lender, you may need to provide your personal and business credit scores. 

Generally, those with higher credit scores secure more favorable rates and terms compared to individuals with lower credit scores. Entrepreneurs with lower credit scores can still secure the funding they need to grow, but they might have to search a bit more intensively for a lender, or they may need to offer collateral as a method of securing the financing. 

Time in Business

Lenders use how long you’ve been in business as a factor in their decision. Businesses that have been operating for several years will likely get approved more than those starting out. Most lenders require you to be at least six months to two years’ time in business. With traditional lenders, though, you need to have been in business for at least two years. 

Cash Flow and Profit and Loss Statements and Balance Sheet

Another thing that lenders look at is your business financials. This includes your cash flow statements, profit and loss statements, and balance sheet. The stronger your financial statements, the higher your approval odds. 

Business Plan

A business plan is a comprehensive document detailing your company objectives and how you plan to achieve your goals. It also tells the lenders how you plan to use the funds you’re looking to borrow. Creating a comprehensive plan will help you obtain a business loan.

Personal and Business Taxes

Apart from financial statements, lenders will also need your personal and business tax returns to verify your income. Therefore, prepare at least two years’ personal and business tax returns to shorten the application process.

Common Types of Small Business Loans

There are several different types of small business loans designed to meet business owners’ specific needs. Knowing how each financing option works will help you choose the best option for your business. Below are seven popular types of small business loans:

Microloans

Microloans are small loans that provide $50,000 or less in funding. These loans are ideal for startups or businesses looking for a small loan amount to cover specific expenses. Many microloans are offered by non-profit organizations or government agencies like the U.S. Small Business Administration. To qualify for a microloan, you may need to pledge collateral, but the requirements for microloans are less restrictive compared to other financing options.  

Invoice Factoring and Invoice Financing

If you struggle to get on-time payments from your customers, you may want to choose invoice factoring or invoice financing. With invoice financing, you can sell unpaid invoices to the lender to get a short-term loan. Typically, the unpaid invoices serve as collateral, so you likely won’t have to offer another asset to secure the financing.

On the other hand, invoice factoring allows you to sell outstanding invoices to a third party, usually a factoring company, and get a percentage of the value of the invoice. The invoice factoring company is responsible for collecting payments from your customers.

Term Loans

Term loans are the most popular type of small business loans. Loan amounts are disbursed in one lump sum with a fixed repayment schedule over a given period of time. One major advantage of term loans is that you can use the funds for a variety of purposes without any restriction. However, you may have to give your lender a detailed plan of how you intend to use the borrowed funds before they approve you.

Merchant Cash Advances

A merchant cash advance allows you to borrow an advance using your future sales. Like traditional business loans, you’ll receive a lump sum amount of cash up front, repayable with a percentage of business sales or daily credit card sales. Merchant cash advances are typically ideal for businesses with high credit card sales.

Quick and Easy Small Business Loans

SBA Loans

The U.S. Small Business Administration offers loans to small businesses that may find it difficult to qualify for conventional loans. These loans are the most highly regarded because of their lower interest rates, larger loan amounts, and long repayment terms. While they may sound like the best option, the application and funding process can take up to three months, making them uniquely beneficial for entrepreneurs who don’t need fast funding.

Business Lines of Credit

Like credit cards, business lines of credit give you access to funds on an as-needed basis. You can draw as much as you want until your reach your maximum spending limit, repay, and borrow again. One of the best parts of a line of credit is that you only pay for what you draw, so you won’t have to worry about paying interest on the total amount of your credit line.

Equipment Financing

If you need to purchase a new piece of expensive equipment, you should consider equipment financing. You can use the funds to finance the purchase of machinery, vehicles, furniture, or computers. In most cases, the equipment you’re looking to buy acts as collateral for the loan.

Steps to Get a Small Business Loan

Getting a small business loan doesn’t have to be a stressful venture. Here are six steps to help you navigate the business loan application process.

1. Decide The Loan Amount Based on How Much You Can Borrow

The first step you need to take before applying for a small business loan is deciding the amount you need. To determine the exact amount, take a moment to ask yourself why you need a loan. Whether you’re looking for startup capital costs, need working capital, or want to purchase equipment, add up all the expenditures that you need to cover.

2. Determine The Type of Loan You Qualify For

You need to determine the eligibility requirements to be eligible for a business loan. Requirements vary by lender, but most of them will want to know your credit score to evaluate your risk as a borrower. 

Lenders will also want to know how long you’ve been in business, with the majority requiring at least two years’ time in business. Your business financials are something lenders must have a look at to evaluate your financial stability.

Once you’ve reviewed your business information and gotten up to speed on lender eligibility criteria, you can narrow down your search and find the financing option that will benefit your organization the most.

3. Choose Your Repayment Terms

How will you repay your loan? This is a crucial step to consider when applying for a loan, as you don’t want to run into a situation where you’re struggling to pay back your financing. Determine how much you can afford to pay every month by looking at your cash flow. Lenders determine monthly payments by looking at factors like:

  • Credit history
  • Time in business
  • Business financials, including profit and loss statements as well as balance sheets 

Your credit score is the major determining factor of your repayment terms. If your credit score is good, you can expect lower monthly payments, while bad credit often translates to higher monthly payments.

4. Decide If You Can Provide Collateral

Small business loans can be secured or unsecured. Secured loans require collateral to back up the loan, while unsecured ones don’t have that requirement. When you pledge an asset as collateral, you authorize the lender to seize and sell it in case you default. While it may sound risky, it’s a way to get lower interest rates and potentially secure a huge loan amount.

5. Compare Lenders

It’s always a good idea to shop around before applying for a loan. Not all lenders are created the same: some require collateral, and some do not; others charge lower interest rates while others are high. Compare the loan terms and other details offered by different lenders, and go for one with favorable terms that fit the needs of your organization.

6. Apply for Your Small Business Loan

Finally, it’s time to apply for a small business loan. You can do this online by filling out a simple online application form. If you meet the lender’s requirements, you’ll likely get approved and funded within a couple of days. 

Get Help with the Process to Get a Small Business Loan

Do you need help to get started with your small business loan? If so, National Business Capital will match you with a lender to get business financing tailored to meet your needs. The online marketplace offers a wide range of loan options through its lending partners. This includes small business loans, business lines of credit, and equipment financing

Visit the National Business Capital website to learn more or start a simple online application without impacting your credit score.

National Business Capital

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